By Kevin Parker, Managing Partner, and George Parker, COO, Sustainable Insight Capital Management
The world’s largest asset manager joins clients and competitors in holding boards accountable for ignoring climate risk.
When Larry Fink issued his now famous letter in mid-January it was hardly a pioneering stand on behalf of the environment. Rather BlackRock has taken a clear-eyed approach to managing risks and addressing client demand, two fundamental pillars of asset management. In the process, BlackRock is forcing boards and managers to recognize the materiality of sustainability issues and raising the profile of organizations dedicated to standardizing the disclosure of those issues while exiting sectors in long term secular decline.
In 2014 we argued for the inevitability of ESG. Since then investors have come to more fully understand the financial impact of environmental, social and governance factors on corporate performance. Ignoring ESG factors or labeling them as purely non-financial concerns will no longer suffice for corporate boards. Investment managers have also felt the sting, losing assets for using offensive language, failing to diversify or simply not meeting product demand. And as the buy side continues to apply ESG metrics beyond asset selection to analyzing business partners, sell-side brokers may face reduced order flow for not levelling up.
For many investors, the paramount ESG concern is climate change. Warming winters, rising seas and a cascading series of global natural disasters are breaking down the wall of resistance to climate change science in BlackRock’s largest market. It is also convincing leaders of the world’s largest pools of capital to become advocates for action from divestment (Norges Bank) to engagement (the Government Pension Fund of Japan (GPIF)).
Current calls for divestment are supported by both ethical and financial concerns. The rising costs of capital for fossil fuel producers has become a regular risk factor in financial statements as increasing numbers of lenders, insurers and investors walk away. Investors also recognize that regulatory action on carbon will combine with automobile electrification and the declining price of renewables to render some currently valuable fossil fuel reserves worthless. In the medium term, performance has continued to lag with energy claiming the spot as the lowest performing sector in the S&P 500 over the past ten years.
In addition to divestment, investor engagements, often spearheaded by a growing number of third-party advocates such as Climate Action 100+, Climate Disclosure Project and CERES, are pushing companies to address climate-related issues as varied as support for climate lobbying, responsible sourcing of animal products and renewable energy sourcing. Despite recent SEC efforts to tamp it down, this trend is likely to continue, an inevitable product of technology development and the rising democratization of the shareholder base.
The market seems to be reflecting a change in sentiment, with flows into ESG strategies growing rapidly in the US, in direct contrast to the general move from active to passive.
A recent Deutsche Bank paper argues that we have passed a tipping point, and provides performance-based evidence for why, contrasting the strong performance of companies with good climate change policies with that of laggards. Large financial firms have recognized the trend as well, with Moody’s, ISS and MSCI among those enhancing their climate data offerings with third-party acquisitions over the past three years.
Enter BlackRock, the largest outside manager for GPIF and the subject of recent criticism for its voting record on ESG-related shareholder proposals.
BlackRock has decided to embrace limited versions of both approaches while pushing what some observers believe to be the its most important contribution: standardization of disclosure. BlackRock announced it will begin to divest thermal coal producers. Given the declining demand for coal and series of bankruptcies among the few remaining US miners, it would have been prudent for BlackRock to have reached this conclusion earlier. In addition, BlackRock has begun to launch additional strategies that will screen fossil fuel companies, a sector that has underperformed the S&P 500 for the last several years.
Perhaps more importantly, BlackRock will apply its massive scale to “investment stewardship activities.” Boards and managers that don’t address sustainability related risks and provide the proper disclosure to shareholders will find the world’s largest asset manager voting them down. State Street and BMO quickly followed with similar pledges.
If successfully implemented, BlackRock’s efforts will yield many winners, perhaps the biggest of which are the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate Related Disclosures (TCFD). These two organizations have been driving to standardize corporate sustainability and governance disclosures, much to the relief of many corporate managers who have struggled to answer the variety of requests sent their way.
One of our stated goals in launching Sustainable Insight in 2013 was to bring sustainable investing into the mainstream. With the world’s largest asset manager joining the world’s largest investors in embracing climate change and engaging companies in its portfolio, we seem to be squarely there. •
The above article is for informational purposes only. It is not an offer or solicitation for any security or investment product managed by SICM and should not be construed as investment advice. Investment strategies implemented by SICM on behalf of its clients may or may not trade or hold positions in the securities referred to above. Further, investment accounts managed by SICM may or may not employ strategies based on or related to the above research.
